The Euro held the range from earlier this month as it quickly gave back the overnight advance to 1.3284, and the single currency remains at risk of a major selloff as it continues to carve out a head-and-shoulders top in March. Indeed, Portugal sold EUR 1.61B in 12-month bills yielding 3.652%, which compares to the 4.943% offered in February, while the Greek Parliament approved the austerity measures tied to the second bailout to secure the additional EUR 130B in international assistance.

At the same time, European Central Bank board member Joerg Asmussen said the Governing Council must ‘carefully prepare’ an exit strategy after injecting more than EUR 1 trillion into the banking system, but we may see the ECB continue to carry out its easing cycle in 2012 as the euro-area faces a risk for a prolonged recession. As the sovereign debt crisis continues to dampen the fundamental outlook for the region, ECB President Mario Draghi may have little choice but to expand the balance sheet further, and the ongoing turmoil across the region will continue to drag on the exchange rate as European policy makers struggle to restore investor confidence. As the EURUSD continues to trade below the February 9 high (1.3320), we should see the reversal pattern take shape over the near-term, and we anticipate to see the pair fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2630-50 to test for near-term support.

The British Pound came under pressure as the Bank of England Minutes showed board members David Miles and Adam Posen voting to increase the Asset Purchase Facility by another GBP 25B, but it looks as though the Monetary Policy Committee will maintain a wait-and-see approach throughout the first-half of 2012 as the group struggles to meet on common ground. Indeed, the BoE saw both downside and upside risks to inflation, citing higher oil prices amid the ongoing slack within the real economy, but we may see the committee continue to soften its dovish tone for monetary policy as the government raises its fundamental outlook for the U.K. Chancellor of the Exchequer George Osborne now sees the economy expanding 0.8% in 2012, which compares to the 0.7% forecast from back in November, and the MPC may look to conclude its easing cycle this year should the economic recovery gather pace. As the GBPUSD looks to have made another failed run at 1.6000, we should see the exchange fall back towards the lower bound of its recent range around 1.5600, and the sterling may continue to track sideways over the near-term as market participants weigh the outlook for monetary policy.

The greenback extended the rally from earlier this week, with the Dow Jones- FXCM U.S. Dollar Index (Ticker:USDOLLAR) rallying to a high of 10,021, and the reserve currency may continue to track higher as the Federal Reserve curbs speculation for another large-scale asset purchase program. Minneapolis Fed President Narayana Kocherlakota argued that the FOMC should conclude its easing cycle and look to start normalizing monetary later this year as the central bank takes note of the more robust recovery. The shift in the policy outlook continues to reinforce our bullish call for the USD, and we should see the Fed further soften its dovish tone for monetary policy as the rise in economic activity paired with sticky prices raises the risk for inflation.

--- Written byDavid Song, Currency Analyst

To contactDavid, e-maildsong@dailyfx.com. Follow me on Twitter at @DavidJSong

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